Merger externalities in oligopolistic markets

We evaluate the external effects of 183 large mergers at the market level by assessing the impact on the main competitors of the merging firms. Using synthetic control groups and difference in difference estimation, we find that the return on assets of rival firms increases significantly after a merger. The size of the effect varies strongly with market characteristics and the intensity of competition.     

An experiment on partial cross-ownership in oligopolistic markets

We examine coordinated and unilateral effects of horizontal partial cross-ownership (PCO) in a laboratory experiment. We consider homogeneous Bertrand markets where firms have symmetric, non-controlling shares of each other, and conduct the experiment with both stranger and partner matching. The partner data (repeated game) confirm the prediction that firms are more (tacitly) collusive with PCO than without. In the stranger data (one-shot game), average prices are increasing with higher degrees of PCO. This is inconsistent with rather extreme Nash predictions for this setup. We show that in a Quantal Response Equilibrium firms’ incentives to compete are reduced with passive PCO. QRE predictions explain the data from the stranger treatment well.     

R&D competition versus R&D cooperation in oligopolistic markets with evolving structure

This paper considers investment behavior of duopolistic firms subject to technological progress. It is assumed that initially both firms offer a homogeneous product, but after a stochastic waiting time they are able to implement a product innovation. Production capacities of both firms are product specific. It is shown that firms anticipate a future product innovation by under-investing (if the new product is a substitute to the established product) and higher profits, and over-investing (in case of complements) and lower profits, compared to the corresponding standard capital accumulation game. This anticipation effect is stronger in the case of R&D cooperation. Furthermore, since due to R&D cooperation firms introduce the new product at the same time, this leads to intensified competition and lower firm profits right after the new product has been introduced. In addition, we show that under R&D competition the firm that innovates first, overshoots in new-product capacity buildup in order to exploit its temporary monopoly position. Taking into account all these effects, the result is that, if the new product is neither a close substitute nor a strong complement of the established product, positive synergy effects in R&D cooperation are necessary to make it more profitable for firms than R&D competition.     

Acquisitions,entry, and innovation in oligopolistic network industries

In industries with network effects, incumbents' installed bases create barriers to entry that discourage entrepreneurs from developing new innovations. Yet, entry is not the only commercialization route for entrepreneurs. We show that the option of selling to an incumbent increases the innovation incentives for entrepreneurs when the network effects are strong and incumbents compete to preemptively acquire innovations. Thus, we establish that network effects and installed bases do not necessarily restrict the innovation incentives and that network effects promote acquisitions over entry.     

The effects of personal information on competition: Consumer privacy and partial price discrimination

This article studies the effects of consumer information on the intensity of competition. In a two dimensional duopoly model of horizontal product differentiation, firms use consumer information to price discriminate. I contrast a full privacy and a no privacy benchmark with intermediate regimes in which the firms can profile consumers only partially. I show that with partial privacy firms are always better-off with price discrimination: the relationship between information and profits is hump-shaped. In particular, competing firms prefer to target consumers with partial but asymmetric information about preferences. Instead, consumers prefer either no or full privacy in aggregate, but the effects of information on individual surplus are ambiguous: there are always winners and losers. Finally, I study the information acquisition incentives of the firms when there is an external data seller. When this upstream data broker holds partially informative data, an exclusive allocation arises. Instead, when data is fully informative, each competitor acquires consumer data but on a different dimension. These findings are relevant for the strategic decisions of firms active in digital markets and contribute to the policy debate surrounding privacy, exclusive access to data and competition.     

Consumer welfare and GM food labeling: A simulation using an adjusted Kumaraswamy distribution

Genetically modified (GM) food products and their labeling have become a major policy issue with impassioned public debates. We explore the impact of different labeling regimes on consumer attitudes towards GM products and consumer welfare. Our experimental results illustrate that these consumer attitudes do not follow the Uniform distribution as has often been assumed in the literature but instead fit an adjusted Kumaraswamy distribution. If a Uniform distribution is assumed, the advantage of mandatory labeling would be exaggerated. Using an adjusted Kumaraswamy distribution our simulation results demonstrate that voluntary labeling is superior to mandatory labeling with the higher separation cost, while mandatory labeling is not necessarily better with lower separation cost. Therefore, the governments of China and other countries with similar consumer characteristics should consider voluntary labeling for GM food while encouraging innovations that reduce the price of GM food as well as controlling the opportunistic behavior of its producers so as to enhance the advantage of voluntary labeling.     

Consumer surplus vs. welfare standard in a political economy model of merger control

This paper considers the political economy environment that an antitrust agency is operating in and asks under what circumstances a consumer surplus standard yields higher welfare than a welfare standard. In particular, we address how institutional settings—such as transparency and accountability—interact with the choice of an appropriate standard. We consider a framework in which the antitrust agency can be influenced by third parties (at a cost in terms of real resources) and in which the agency is imperfectly monitored. A welfare comparison between the two standards reveals that neither standard dominates. The consumer surplus standard is attractive relative to a welfare standard, when lobbying is efficient, when accountability is low, where mergers are large and when a marginal increase in merger size is highly profitable.     

Consumer perceptions and the effects of country of origin labeling on purchasing decisions and welfare

The study develops a general analytical framework of heterogeneous consumer preferences to examine the effects of country of origin labeling (COOL) regulation on consumer purchasing decisions and welfare. We show that while differences in consumer perceptions about COOL information, namely, whether it is viewed as an attribute that differentiates products vertically or horizontally, do not alter the nature of the market and consumer welfare effects of mandatory COOL, the relative strength of consumer preferences for COOL are shown to be important in determining the magnitude of these effects. In addition, our results show that the benchmark used (a no COOL versus a voluntary COOL regime) is critical in evaluating the effects of the policy. We show that, under both horizontal and vertical product differentiation, a change from a no COOL to a mandatory COOL regime decreases (increases) the welfare of consumers with weak (strong) preference for COOL while a change from a voluntary to a mandatory COOL regime leads to an unambiguous loss in consumer welfare.     

Ethnicity in housing markets: Buyers,sellers and agents

This paper examines how ethnicity related to cultural differences arising from ethnic background affects housing market transactions in the Atlanta metro area. Using both the US Census and Wikipedia approaches to infer ethnicity from individuals' names, we find that the interplay of buyer, seller, and agent ethnicity composition affects interaction in the housing market. Sellers working with listing agents in the same ethnic group set higher listing prices and enjoy higher selling prices and quicker sales. Agents working with same ethnicity buyers yield higher prices and liquidity. Even though sellers only communicate with buyers through their agents, houses sold by sellers to buyers of same ethnicity have higher prices and sell faster. And while the ethnic mix of agents and their clients matter, the ethnic mix of agents in the transaction does not.     

Food subsidies in Egypt: reform options,distribution and welfare

Egypt's food subsidies (in 1996/97 5.5 percent of government expenditures) cover rationed cooking oil and sugar (23 percent of subsidy cost) and unrationed bread and flour (77 percent). The subsidies enhance food security but are nontargeted and have substantial leakages. This paper uses a Computable General Equilibrium (CGE) model to simulate the short-run effects of alternative food-subsidy scenarios. Government savings from reduced spending finance uniform cuts in direct tax rates across all household types. The model uses a 1996/97 database with detailed household information. The targeting of cooking oil and sugar subsidies to “the needy” (the bottom two quintiles in rural and urban areas) has a progressive effect while elimination of this subsidy is regressive. Disaggregated household consumption changes are small (±0.3 percent). The targeting of all food subsidies is pro-needy, partly due to important indirect effects. The consumption of the needy increases by 0.5 percent with little change for the nonneedy. Food subsidy elimination is regressive: the needy suffer a consumption loss of 1.1 percent. If the government savings instead are transferred to the needy, the impact is reversed: consumption increases by 4.2 percent for needy households while the nonneedy register a small loss. The overall policy implication is that food subsidy reform can benefit the needy with at worst only a modest negative impact on the nonneedy. If the subsidy is entirely eliminated, targeted government programs would be necessary to protect the needy from the negative impact.     

Commercial software,adware, and consumer privacy

I study the choice between selling new software commercially and bundling it with ads and distributing it for free as adware. Adware allows advertisers to send targeted information to consumers which improves their purchasing decisions, but also entails a loss of privacy. I show that adware is more profitable when the perceived quality of the software is relatively low, when tracking technology improves, when consumers benefit more from information on consumer products and are less likely to receive it from external sources. I also show that improvements in the technology of display ads will lead to less violation of privacy and will benefit consumers, that depending on the software's quality, there are either too many or too few display ads in equilibrium, and that from a social perspective, adware dominates commercial software.     

Industry and firm effects of privatization in Malawian oligopolistic manufacturing

This study evaluates the impact of privatization on technical efficiency using panel data from privatized enterprises, state-owned enterprises and private enterprises competing in oligopolistic Malawian manufacturing industries in which privatization took place. The results of the technical efficiency model, based on the period 1970–1997, provide evidence that privatization increases the technical efficiency of all firms (industry effects). Further incentives for improvements in technical efficiency are due to more domestic competition, multinationality and structural adjustment.     

Regulatory risk,investment, and welfare

This paper assesses the allocative and distributional effects of uncertain regulatory constraints on rate of return, on price, and on competitive entry. A profit-maximizing firm responds to rate-of-return risk by substituting variable factors for sunk investment, but expands capacity when faced with either price risk or entry risk. Investors gain from the elimination of regulatory risk, a result that parallels Peltzman's contention that regulators could raise investor wealth by reducing risk. Consumers benefit from price and entry risk, but only under severe restrictions on tastes and technology. An inherent feature of government intervention, regulatory risk should be taken into account when comparing alternative policies for regulating (or deregulating) an industry.     

Structure,conduct, performance,and welfare

This paper extends previous analysis of weaknesses of the structure-conduct-performance paradigm and of the price-cost margin as a measure of performance. Sufficient conditions are established under which monotonic linkages may not exist between virtually any two of social welfare, its individual components, structure, conduct, or performance.     

Rental markets,gender, and land certificates: Evidence from Vietnam

In developing countries, a significant share of land transactions occurs among closely related parties and often does not entail any specific compensation (in-kind or monetary). Despite the prevalence of these non-market or informal transactions, the literature has paid little attention to the determinants and consequences of these exchanges. In this paper we shed light on the role land use certificates play on the agreed compensation of rental agreements when landlords, particularly those with weaker ex-ante tenure security (i.e. women), rent out land to their relatives in Viet Nam. We find that female-headed households who lease their plots to relatives are less likely to receive any type of payment, unless they possess a title for the plot they leased. A regional decomposition of our results shows that this effect is more predominant in the Northern regions.     

Mobile money,family assistance and welfare in Cameroon

This paper aims to investigate the effect of mobile money services on the welfare in Cameroon. It specifically verifies whether the welfare of people benefiting from family assistance is improved via the mobile money services offered by the two main operators in the country, namely: Orange and Mtn. The data used come from the « FinScope Consommateur Cameroun » Survey carried out in 2017 by the National Institute of Statistics (INS). Based on the propensity scores estimations, this study shows a positive and significant effect of mobile money on welfare. However, among the operators, Orange has a better impact compared to Mtn which does not present a significant effect. These results call on the authorities in charge of the development and implementation of financial inclusion policies to recognize the interest of digital financial services at the heart of financial inclusion strategies for the welfare of the poor.     

Team composition,worker effort and welfare

A successful organization needs the right team. We explore the optimal mix of familiar workers (who we call incumbents) and less familiar workers (newcomers) when production is group-based. If incumbents have a lower marginal return of effort, they will have less incentive to invest relative to newcomers. This is true, even when incumbents produce more for any given level of effort. This creates a tradeoff: less familiar agents will invest more whereas a more familiar team is inherently more productive. In our setup, the non-investing principal (weakly) prefers less familiar agents than the team that maximizes second-best surplus. On the other hand (symmetric) agents prefer a more familiar teammate compared with the second-best option. These insights have implications for team composition, job rotation and worker tenure.     

Emerging capital markets: A case study of equity markets in Pakistan

The Pakistan financial system displays all the classic characteristics of an emerging market: market capitalisation amounts to only 5.5% of GNP; less than 0.3% of the population are shareholders, resources mobilised through the capital market are insignificant compared to that through the banking system, and equities account for about 4% of the assets of the financial system.The pricing of both equity and debenture capital is administratively set by the Government. This has resulted in the shares of well-managed companies being issued at below market clearing price. Consequently, new shareholders benefit at the expense of original shareholders. Underwriters are denied any useful function and underwriting commission does not reflect perceived issue risk.There is a paucity of stock of well-run companies. The market also suffers from inadequate information flow and faces some fundamental institutional weaknesses. If the share buying habit is to increase and if savings are to be channelled into financial markets, appropriate mechanisms need to be developed for both broker and investor protection.The views expressed in this paper are those of its authors and do not necessarily represent the opinions of the International Finance Corporation. The information presented here in has been obtained from sources believed to be reliable, but is not guaranteed as to completeness or accuracy.     

Economics at the FTC: Mergers,Dominant-Firm Conduct,and Consumer Behavior

Economists at the Federal Trade Commission (FTC) pursue the agency’s competition and consumer protection missions. In this year’s essay, in antitrust, we discuss the new Merger Guidelines, three exclusion cases, and R&D issues in the Thoratec/HeartWare merger and the Google/AdMob merger. In consumer protection, we discuss the FTC’s new rule on debt settlement, our efforts to improve disclosures, and our recent work on appliance energy disclosures.     

Regulatory decision errors,Legal Uncertainty and welfare: A general treatment

We provide a general treatment of the implications for welfare of various sources of legal uncertainty facing agents about the decisions made by a regulatory authority. We distinguish the legal uncertainty from the decision errors made by the authority. While an increase in decision errors will always reduce welfare, for any given level of decision errors, information structures involving more legal uncertainty can improve welfare. This holds always when sanctions are set at their optimal level. This transforms radically one's perception about the “costs” of legal uncertainty. We also provide general proofs for two results, previously established under restrictive assumptions.